La Poste Benchmarks Operating Costs Against Peers

Case Type: business competition, competitive benchmarking; reduce costs.
Consulting Firm: Oliver Wyman second round job interview.
Industry Coverage: government & public sector; freight delivery, shipping services.

Case Interview Question #00495: Our client La Poste is the state-owned public limited company providing mail service in France (similar to United States Postal Service in the US). It is headquartered in the 15th arrondissement of Paris. In addition to postal services, it also offers banking services (with La Banque Postale) and, via Chronopost, courier services. After the French government, La Poste is the second largest employer in France.

Recently the management of La Poste is worried because a recent benchmarking study has revealed that the cost of running its operations is much higher than for similar organizations in other countries. As per this study, it is nearly 70% more expensive to send a standard mail from location A to location B than it would be in a neighboring country, say Germany or Spain, for the same parcel and the same distance. La Poste management wants to know why and what they can do about it. How would you go about analyzing the case?

Possible Answers:

1. What immediate thoughts came to your mind (or should have) when you heard the problem statement of the case, based on the type of case, for example — marketing versus cost reduction?

In this case, the first obvious trap is that we are not talking about a regular corporation. Being a state-owned institution, the client La Poste is obliged to supply the same services to all the citizens of the country. You cannot segment the market or discriminate. Solutions that imply either reducing the level of services or pulling out of some geographical areas are not valid. This constrain is central in the case.

Therefore, considering this company based on the network economies / diseconomies and the traditional methods available to address such issues would be a big mistake.

2. How did you prioritize the issues and what information did you filter out?

In this case, there is no easy framework to apply. The best way to go about it is to try to collect as much information as possible, generate hypotheses and then assess which ones can cause material differences between the client’s operating costs and other countries’. Anyway, you should at least explore the following areas:

• Cost structure
• Comparability of services delivered
• Utilization rate of the network
• Set-up of the operations

3. What additional information did you ask for and what information did you get?

• What does the cost structure of the organization look like?
• What is the relative importance of fixed costs and variable costs?
• What is included in the fixed and variable costs?
• How does the cost structure compare to neighboring countries?

In this case, costs are mainly fixed. Not only the infrastructure, but also the payroll must be considered as a fixed cost because the client La Poste’s employees have a governmental agent status and can therefore not be fired as easily as regular corporate employees. An employee costs USD $60,000 a year at La Poste, which is almost the same compared to other countries.

4. How are operations set-up?

Pick-up parcels and letters => sort parcels and letters => carry and distribute parcels and letters

4.1 Pick-up process

• France: Twice a day, agents collect the parcels and letters from official mailboxes spread over the country. Clients can also bring their parcels and letters to Post Offices. Once a day, letters and parcels are sent to sorting facilities where they are sorted at night. It takes an agent 12 minutes to empty a mailbox and on average he empties 40 mailboxes a day. Each mailbox contains 50 letters on average.
• Other countries: Only once a day agents collect letters from mailboxes. It takes an agent 10 minutes to empty a mailbox and he empties 50 mailboxes a day on average. Each mailbox contains 80 letters on average.
• The main reason is a different design of the mailboxes.

4.2 Sorting process

• Manual sorting: 200 letters per hour per person. Cost = $60,000 per person per year.
• Sorting machine: 4,000 letters per hour — requires 3 persons to operate the machine. Cost of the machine = $1,800,000 depreciated over 10 years (linear).
• France: 60% of the sorting process is manual.
• Other countries: 80% of the sorting process is automated.

4.3 Distribution

• France: One agent can distribute 8,000 letters per day
• Other countries: one agent distributes 10,000 letters per day
• Explanation: other countries are more densely populated, there are less people/square mile in France.

Is the client’s business a monopoly? – Yes

What is the network utilization rate? – Based on the number of letters collected per mailbox/post office, the utilization rate of France’s network is lower than in the other countries (50 vs 80 letter per mailbox), i.e. you need more people or more frequent pick-up to collect the same number of letters in France.

You soon realize that this case is not about cost cutting. The question is to determine why the costs are higher in France, and is there anything we can do about it under the constrain that we have to offer a “universal service”.

5. Math: simple calculation based on the information received previously.

Mail pick-up cost

• France: 40 mailboxes per day * 50 letters per mailbox * 300 day = 600,000 letters per year. $60,000 / 600,000 letters = $0.10 per letter
• Other countries: 50 mailboxes per day * 80 letters per mailbox * 300 day = 1,200,000 letter per year. $60,000 / 1,200,000 letters = $0.05 per letter

Mail sorting cost

• Manual: $60,000 per year / (200 letters per hour * 8 hours per day * 300 days per year) = $0.125 per letter
• Automated: (sorting machine $1,800,000 / 10 years + agents cost $60,000 * 3) / (4,000 letters per hour * 8 hours per day * 300 days per year) = $0.0375 per letter
• France: $0.125 * 60% + $0.0375 * 40% = $0.09 per letter
• Other countries: $0.125 * 20% + $0.0375 * 80% = $0.055 per letter

Mail distribution cost

• France: $60,000 per year / (8,000 letters per day * 300 days per year) = $0.025 per letter.
• Other countries: $60,000 per year / (10,000 letters per day * 300 days per year) = $0.02 per letter

Total Cost per letter processed

• France: $0.10 + $0.09 + $0.025 = $0.215 per letter
• Other countries: $0.05 + $0.055 + $0.02 = $0.125 per letter
• France vs. other countries: ($0.215 – $0.125) / $0.125 = 72% higher

Visual representation of the data

Conclusion

In the end, you realize that there isn’t one major reason, but half a dozen minor ones that combine to make the business much more difficult to run efficiently in France than in the neighboring countries. The sooner you abandon a cost analysis type of framework, the better.